Recent Decision Concerning Asset Protection Trusts
I am often asked by clients, “How effective are international asset
protections trusts?” With almost 20 years experience in advising
clients on asset protection planning, the international asset
protection trust (APT) remains our most recommended and effective
protection strategy. In part, I recommend APTs (when appropriate)
because of the trust-friendly laws that exist in certain foreign
jurisdictions. A recent case in Jersey (Channel Islands) illustrates
just how effective such laws can be when it comes to protecting trust
assets.
In a June 2003 ruling (Abacus v. Esteem Settlement),
the Royal Court in Jersey upheld a trust against an attack by creditors
of the settlor-beneficiary. The trust in this case is a discretionary
trust, with an independent trustee, whose beneficiaries are Sheikh
Fahad Mohammed Al-Sabah (the trust settlor) (“Sheikh Fahad”), his wife
and their son. Attempting to collect on an $800 million judgment
against Sheikh Fahad (for fraud, no less), Plaintiff Grupo Torras SA
(“GT”) sought to reach the assets of the trust on five separate
theories, yet proved to be unsuccessful on each theory. In what proved
to be a key factual determination for Settlor, the court determined
that the trust funds in question were “clean assets,” i.e., assets that
were validly contributed to the trust well before GT became a creditor
of Sheikh Fahad. Since this ruling deals only with “clean assets,”
fraudulent transfer was not at issue. Under accepted principles of
Jersey common law, a self-settled spendthrift trust cannot be set aside
by creditors—unless it was initially set up as a fraud against
creditors.
First, GT argued that the trust was a sham. The
Court, applying the “classic definition” of sham, ruled that the trust
was not a sham, because there was no “common intention” between the
trust parties (i.e., settlor and trustee) to create the appearance of
legal rights and obligations that are different from the intended
rights and obligations. Importantly, the Court held that Sheikh Fahad’s
intent alone, as trust settlor, was insufficient to make a sham
determination. That is, if a trustee enters in good faith into a trust
with the intent to exercise its fiduciary powers and abide by the trust
terms, then the trust is valid.
Second, GT contended that the
trust was void because Sheikh Fahad retained “dominion and control”
over the assets. Citing previous Jersey case law, the Court held that
dominion and control by a settlor requires a retention by the settlor
of the ability to dispose of the property “without consulting anyone
else or without the consent of any other person.” Further, the Court
surmised that a settlor may retain control through the language of the
trust deed or through a secret arrangement with the trustee in spite of
the trust language (i.e., a sham). Finding neither situation to in this
case, the Court rejected GT’s second argument.
It is important
to note that the Court found that Sheikh Fahad did not retain dominion
and control, even though numerous transactions were made at Sheikh
Fahad’s request and no such request was ever refused. In this regard,
the Court stated, “In our judgment trustees who consider a discretion
in good faith…cannot be said to be under the substantial or effective
control of the requesting settlor. … It cannot be sufficient simply to
show that, in practice, trustees have gone along with a settlor’s
wishes [because this result could be] consistent with the trustees
having exercised their fiduciary responsibilities properly [by] having
decided that each request of the settlor was reasonable and in the
interests of one or more beneficiaries.”
Third, GT argued that
the trust’s veil should be pierced, because the trust was administered
as though the assets were held in “bare trust” for Sheikh Fahad. The
Court rejected this argument, holding that a valid trust should not be
pierced provided the trustee has not abdicated its fiduciary duties.
Again, because the trustee acted as a fiduciary, the fact that Sheikh
Fahad’s requests were always honored was insufficient to prove GT’s
contention of a “bare trust”.
Fourth, GT argued that Sheikh
Fahad should not continue to benefit from the trust following his
fraudulent conduct—i.e., that the trust should be invalidated as a
matter of public policy. Because the trust was validly created with
“clean assets,” the court declined to invalidate the trust on public
policy grounds.
Finally, GT sought to impose upon the trust a
remedial constructive trust because of Sheikh Fahad’s misuse of the
trust coupled with his substantial control. Again, because the trust
was funded with “clean assets,” the court refused to apply a
constructive trust (a notion foreign to Jersey law), because there had
been no unjust enrichment of the trust at GT’s expense.
I
believe that this case illustrates that, if formed and maintained
properly, international APTs can, indeed, be quite effective. First,
assuming no fraud against creditors at the trust’s inception, it can
prove quite difficult to reach the assets of international APTs.
Funding an international APT with “clean asset” and prior to any claims
of creditors will go a long way (if not prove definitive) on the issue
of fraud. Second, having an independent fiduciary who respects the
trust agreement is vital towards upholding the integrity of a trust. In
the illustrated case, even though the trustee always honored Sheikh
Fahad’s requests, the mere fact that trustee did so in good faith was
sufficient to deem the trust valid. Finally, even though Sheikh Fahad
had defrauded GT out of $800 million, the Court refused to let these
“bad facts” color its judgment, especially regarding GT’s public policy
and unjust enrichment arguments—which I believe speaks volumes about
judicial attitudes, in general, towards trust settlers in these
trust-friendly jurisdictions.
If you would like to discuss this
case or its implications on your international APT, please feel free to
contact me at any time.
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1. Of course, the opposite is true, as well. It’s important to note
that, in an earlier case, the trustee had to return trust funds to GT
that were directly traceable to Sheikh Fahad’s fraudulent conduct.
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